2018 (4) TMI 47 - HC - Income Tax

Disallowance in computing the book-profit u/s 115JB in respect of depreciation claimed on land after amortization of land by the assessee - whether computation of book profit was not as per Companies Act and wrongly claimed depreciation on land not allowable in Companies Act? - Held that - Assessing Officer while computing the income under Section 115-J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115-J - Decided in favour of assessee. Addition in computing the book profit u/s 115JB as well as in normal income in respect of provisions for loss in hedging transaction - Held that - In the present case, the loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) - Decided in favour of assessee. Addition u/s 14A - addition in respect of indirect expenses incurred on administrative and other heads relating to the income to which section 10 applies - Held that - The assessee s business assets were about ₹ 26,930 crores of which ₹ 1014 crores were invested in its wholly owned subsidiaries. It is from the investment in its subsidiaries that the assessee earned ₹ 36.06 crores by way of dividend. However, it is important to note that the assessee had, free funds of its own of a sum of ₹ 17,275 crores available to it. As against the investment of ₹ 1014 crores which yielded dividend of ₹ 36.06 crores, the assessee had available to it ₹ 17,275 crores. As Mr. Ved Jain, the learned counsel appearing on behalf of the assessee, rightly submitted, the presumption is that the assessee used its own funds while making the investment of ₹ 1014 crores in the subsidiaries. There is nothing to rebut this presumption. The Tribunal, therefore, rightly held that there was no question of disallowance under section 14A.- Decided in favour of assessee.

Issues Involved:
1. Treatment of "Advance Against Depreciation" as income.
2. Deletion of addition made by Assessing Officer under section 143(3) on account of "Advance Against Depreciation".
3. Disallowance of depreciation claimed on land under section 115JB.
4. Application of Supreme Court decision in Apollo Tyres case regarding computation of book profit.
5. Deletion of disallowance made by AO in computing book profit under section 115JB for provisions made for gratuity, leave encashment, etc.
6. Deletion of addition made by AO in computing book profit under section 115JB and normal income for "provisions for loss in hedging transaction".
7. Deletion of addition made by AO under section 14A by applying Rule 8D.
8. Deletion of addition made by AO for indirect expenses incurred on administrative and other heads relating to income exempt under section 10.

Detailed Analysis:

Re: Questions 1 & 2:
The appellant's contention regarding "Advance Against Depreciation" being treated as income was dismissed. The court referred to its previous order dated 14.02.2018 in ITA No.151 of 2015, which covered these questions against the appellant.

Re: Question No. 5:
This issue was covered against the appellant by an earlier order dated 06.07.2010 in ITA No.385 of 2009. The court maintained consistency with its previous judgment.

Re: Questions 3 & 4:
The Tribunal based its decision on its earlier ruling dated 30.09.2014 for the Assessment Year 2004-05. The assessee had debited an amount for depreciation of land, which was not owned but used under an agreement with the State Government. The Tribunal upheld the deletion of this addition, noting that the land was amortized for the useful life of the project and the accounting policy was approved by statutory auditors and the Comptroller and Auditor General. The Supreme Court's judgment in Apollo Tyres Ltd. was cited, emphasizing that the Assessing Officer cannot question the correctness of the profit and loss account prepared as per the Companies Act. The court concluded that the Assessing Officer could not reassess the company’s income beyond the provisions of the Companies Act.

Re: Question 6:
The facts involved a loan availed by the assessee and the subsequent hedging agreement to protect against currency fluctuations. The Assessing Officer added the differential amount of interest to the book profit and normal income, considering it a provisional liability. The Tribunal, relying on the Supreme Court's judgment in Commissioner of Income Tax v. Woodward Governor India P. Ltd., held that the loss due to exchange rate fluctuation is an item of expenditure under Section 37(1). The court upheld the Tribunal's deletion of the addition.

Re: Questions 7 & 8:
The Assessing Officer had made disallowances under section 14A by applying Rule 8D, considering the assessee's exempt income from dividend. However, the court referred to a Division Bench judgment in Commissioner of Income Tax vs. M/s Max India Limited, which established that if an assessee has sufficient free funds, the presumption is that investments yielding exempt income are made from these funds. The Tribunal found that the assessee had substantial free funds exceeding the investments in subsidiaries, thus no disallowance under section 14A was warranted. The court agreed with this finding and answered these questions in favor of the assessee.

Conclusion:
The appeal was dismissed, with all questions answered in favor of the assessee and against the appellant. The court upheld the Tribunal's decisions on all issues, maintaining consistency with previous judgments and Supreme Court rulings.

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